By Sayee Srinivasan and Yikai Wang
ABA DataBank
The President’s Council of Economic Advisers recently released a paper on payment stablecoins that asks: What happens to bank lending if stablecoin issuers are prohibited from paying yield? That is the wrong question for policymakers.
The live policy concern is not whether prohibiting yield on payment stablecoins would impact bank lending. It is whether allowing yield on payment stablecoins would encourage deposit flight — especially from community banks — thus raising banks’ funding costs and reducing local lending. By focusing on the effects of a prohibition, the CEA paper risks creating a misleading sense of safety by avoiding the much more consequential scenario: yield-paying payment stablecoins scaling quickly.
We recognize the CEA may have chosen its framing for analytical reasons. But as a practical matter, this framing tracks the crypto industry’s preferred narrative: treat a yield prohibition as the “intervention,” then conclude that the modeled effects (of no prohibition) are small. Policymakers should not mistake that narrow result for evidence that yield-paying payment stablecoins are benign.
What the paper finds — and why it does not answer the policy question
The CEA’s headline conclusion is that prohibiting yield would increase bank lending by about $1.2 billion — essentially a rounding error relative to normal quarterly changes in bank lending. Even if that estimate is directionally correct, it tells policymakers little about the question they really need answered: What is the lending and funding-cost impact of allowing yield as stablecoins grow from today’s scale to a much larger market?
This matters because the baseline doing the work in the CEA paper — currently an immature stablecoin market of roughly $300 billion — will not resemble a future market reaching $1–$2 trillion. In a larger market, yield is not a minor product feature; it is the mechanism that would accelerate migration out of bank deposits. An ABA analysis suggests the resulting credit effects can be economically meaningful even at the state level—for example, a $4.4–$8.7 billion reduction in lending in, for example, a single state like Iowa as the payment stablecoin market grows.
Where there is broad agreement
Across academic and industry studies, there is substantial agreement on a basic dynamic: as yield-paying payment stablecoins expand, households and businesses have stronger incentives to move funds out of bank deposits and into stablecoins, unless Congress prohibits yield. Even if total deposits in the banking system remain constant, deposits will be reallocated away from smaller banks toward a smaller set of large institutions, and the share of deposits tied up in stablecoin reserves will eat into overall bank lending capacity.
That shift matters because the banking system is not one consolidated balance sheet. Community banks lend based on their own local deposit base. When that funding moves, their capacity to extend credit moves with it.
The key omission: immediate pressure on community banks
The CEA paper largely does not analyze what happens at the bank level when deposits migrate into yield-paying stablecoins.
When a community bank loses deposits, it cannot simply “wait.” It must replace funding quickly — often through higher-cost wholesale borrowing, such as Federal Home Loan Bank advances or capital market funding. In a competitive market, banks also face pressure to raise deposit rates to retain customers. Either way, the bank’s cost of funds rises, and higher funding costs translate into less lending and higher borrowing costs for households and small businesses.
This is not primarily a question of whether the system has enough reserves. It is a question of whether smaller banks have the balance sheet flexibility to absorb outflows without cutting back credit.
Why ‘deposit reshuffling’ is not a harmless outcome
The CEA notes that deposits may be “reshuffled” within the banking sector and suggests the system has “slack” to absorb changes. That framing misses the point: a reshuffle can be economically harmful even if total deposits stay flat. As the payment stablecoin market grows, network effects would likely cause a small number of issuers to dominate the market, and these issuers would not be sending their reserves as deposits to smaller banks. If deposits move from community banks to large institutions — or into stablecoin issuer accounts — credit availability can shrink in the places and sectors that rely most on relationship banking.
Narrow consideration of ‘narrow bank’ risks
The paper also gestures at stablecoins as a form of “narrow banking.” But narrow banking, by design, does not perform the core economic function of banks: turning deposits into credit for the real economy. Policymakers have repeatedly rejected a central bank digital currency, even seeking to ban it by law, to avoid the risks of narrow banking at scale.
If policy encourages a shift toward narrow-bank-like models, policymakers need a credible account of how credit intermediation is preserved, not simply an assertion that the payment system becomes “safer.”
Conclusion
Policymakers should not take comfort from a study showing that prohibiting stablecoin yield might have a small, near-term effect on aggregate lending. That is not the contested scenario. The contested scenario is whether allowing yield on payment stablecoins will accelerate deposit migration — especially from community banks — raising funding costs and reducing local credit.
The bottom line is simple: The CEA paper minimizes the core risk by starting from the wrong question. There is already ample evidence and analysis showing that a prohibition on yield for payment stablecoins is a prudent safeguard. Such a policy will allow stablecoins to mature as a payments innovation rather than as an economically risky substitute for insured bank deposits.
Sayee Srinavasan is chief economist at ABA. Yikai Wang is VP for banking and economic research at ABA.
